The Shoe Moves to the Other Foot

Last year at this time, the U.S. consumer and the homebuyer were buoying our markets and offsetting the declining markets of Europe and China. Now the exact opposite is occurring.

As U.S. housing sinks badly, the Fed can't really counter it, and might not even want to given how unaffordable homes are in many areas of the country. Housing became too overheated in some of the biggest areas. We had just begun to have bids above the offering price abound in some of the biggest markets. There was a developing shortage of homes all over the place.

Higher rates are putting an end to both. But they are also putting an end to a key prop of the U.S. economy and the stock market. Meanwhile, the consumer has slowed spending, particularly on apparel, even perhaps on the home, as the stock of Home Depot (HD) is a terrific barometer of home spending. While the quarter was beautiful, the stock's telling you not to be complacent.

Meanwhile, all the data out of Europe have turned positive. First, it was manufacturing. Now it is service employment. I think Europe could have good year-over-year growth by this time next year.

China? After about a year of "worse than expected" macro numbers, the turn is at hand. The Baltic Freight Index verifies that and the run in the shipping stocks confirms it, too.

These two positives can offset the two negatives. However, they don't buoy the same stocks. The turns in Europe and China, synergistic as they are given that 25% of what China sells goes to Europe, will help the gigantic multinationals in this country. That's what seems to have the best bids underneath. At the same time, the domestic spending stocks, the bulwark of the market for so long, will either take a breather as higher rates cool things off and then recharge when rates stabilize (albeit at a lower level) or just be written off for the year entirely.

On the fence in this debate are tech and banks. Tech should be better with Europe and China coming back, but you can't jump the gun as Hewlett-Packard's (HPQ) results tell you.

The banks? They do better in a sloping curve environment because they can pay you next to nothing and lend and invest your dollars at much higher returns. In the interim, though, they have to readjust their book of business because the higher rates have slammed down the refinancing gold mine and the lack of affordability has hurt mortgage applications. Banks are in flux.

We just don't know enough and we just don't have enough data to make a good decision.

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